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Trading emails with a startup CEO building an iPhone app, I asked him why potential customers would buy his product. In response he sent me a competitive analysis. It looked like every competitive analysis I had done for 20 years, (ok maybe better.)

And it made me sad. Looking at the spreadsheet, I realized that competitive analysis tables are one of the ways professional marketers screw up startups from day one. And I had done my share.

It’s Part of the PlanMost investors require you to write a business plan which includes a section called a “competitive analysis” in which you tell potential investors how your product compares to products other companies trying to develop and sell to the same customers. While most investors don’t actually read your business plan for a first meeting, a summary of your competitive analysis usually ends up as a slide or two in your PowerPoint presentation.

Your goal in this slide is to tell investors: 1) you understand the market you are selling to, 2) you understand the other companies selling in your market, and 3) you understand how and why you are better than any of the products currently in the market. You are also implicitly telling potential investors, “These features on our competitive slide mean we will sell a lot of what we are planning to build so invest in us.”

Death by AnalysisI looked at the competitive analysis this startup CEO sent to me. This guy was experienced, he worked at lots of large companies, so the table was thorough, it had lots of rows and mentioned all the competitors.

Not only was it wrong, it would set his company back months and possibly even kill them.

Why?

Competitive Analysis Drives Feature SprawlIn most startups the competitive analysis feature comparison ends up morphing into the Marketing Requirements Document that gets handed to engineering. The mandate becomes; “Our competitors have these features so our startup needs them too. Get to work and add all of these for first customer ship.”

Product development salutes and gets to work building the product. Only after the product ships does the company find out that customers couldn’t have cared less about most of the bells and whistles.

Instead of optimizing for a minimum feature set (that had been defined by customers) a competitive analysis drives a maximum feature set.

This is not good.

Where Are the Customers?Here’s the problem: How did the founder know which features to choose on the competitive analysis table? When I was running marketing, the answer usually was, “We’ll put up whatever axes or feature comparisons that make us look best in this segment to potential investors. What else would you choose?”

At its best a competitive analysis assumes that you know why customers are going to buy your product. At its worst it exists to rationalize the founder’s assumptions about what they are building. This is a mistake – and it is a contributing factor (if not a root cause) of why most startups get their initial feature set wrong.

If you are building a competitive analysis table, do so onlyafter you understand that the features you are listing matter to customers. Most marketers are happy to build feature comparisons. But customers don’t buy features, they usually buy something that solves a real or perceived need. That’s the comparison you and your investors should be looking at – what do customers say they need or want?

The answer to that question is almost never in your building.

How to Make A Competitive Analysis UsefulA competitive analysis makes sense when your startup is entering an Existing market – where the competitors are known, the customers are known, and most importantly – the basis of competition is known.

(The basis of competition are the features that customers in an existing market have said, “Yes, this is what is extremely important to me. I will dump my current supplier/manufacturer for your new product because yours is smaller/faster/easier to buy/get to/tastes better, etc.)

You win in an existing market when you are better or faster on those metrics that customers have told you are the basis of competition. Your competitive analysis must be around those metrics.

But most startups are not entering an Existing market. They may be trying to:

Take a segment of an existing market by offering a product that
1) costs less (trading fewer features for a lower price) or
2) addresses the specific needs of a customer segment that the existing suppliers have failed to address

Or they may be creating an entirely new market with a disruptive innovation that never existed before.

In a Resegmented market, a competitive analysis starts with the hypothesis of “Here’s the problem we are solving for customers.” The competitive analysis chart highlights the product features that differentiate your startup from the existing market incumbents because of your understanding of specific customer needs (not your opinion)in this niche.

In a New market a competitive analysis starts with the hypothesis of “We are creating something that never existed before for customers.” The competitive analysis table highlights the product features that show what customers could never do before. It compares your company to groups of products or services.

I asked the CEO to go back to the competitive analysis and tell me whether he really knew what features matter most to potential customers. If not, he should get out of the building and find out.

30 Responses

Blue Ocean, while it dissappointed me (I had high expectations for business strategy) discussed “value innovation” as a means for determining what subset of features really matter.

This goes along great with Paul Buchheit’s recent post on limiting design to just a few features and understanding why your startups execution will captivate the market. I added my own 2 cents in Pick3.

I understand the importance of going out and talking to customers to see what features matter most. I am wondering what’s the best way to do this in practice without a selection/anchoring bias.

When I try to go out and find a customer to speak to, it’s usually someone *I think* who has a need for my product. Whether I want to or not, I inevitably end up framing my questions in a way that will confirm/reject *my* hypothesis of what *I think* the customer wants.

This makes me worry that I may actually be missing speaking to my real customer, the one who would really value my product.

Is there a better, less subjective way to identify and speak with potential customers?

Shuba: Not sure if this is helpful or not without knowing more about what your are actually doing, but try a more anthropological approach than what sounds like it may be more of a census taker’s approach. In other words, try to get in your target customers’ shoes by both observing how they address the problem(s) your trying to solve today and and asking broad, open-ended questions. There is a great post by Cindy Alvarez on this at: http://bit.ly/9BWVhk.

Once you’ve done this, brainstorm new ideas and concepts, prototype, test, refine, develop, deploy, rinse and repeat. Another good post on this phase is at: http://www.fictiv.net/process/.

In my experience, a competitive matrix is a crutch for lazy Sales people.

I can’t tell you have many times I’ve been asked to create a competitive matrix to assist the Sales team’s efforts. The problem wasn’t producing the matrix, but in how it ended up being used. While the intention was to provide a basis for understanding our competitive differentiation, it became an external document that ineffective (i.e., lazy) Sales people simply e-mailed to their prospects when asked the dreaded question “How do you compare to XYZ company?” No discussion of customer problems or needs, no open dialogue about pros and cons of solutions, and no crafting of solutions as it related to our unique approach.

Very well put. As someone who has been that customer in a large company (I can’t speak as knowledgeably about consumer markets), I often found that young companies compared themselves against competitors whom we didn’t like and weren’t getting good outcomes from in the first place. It was the rule rather than the exception that pitches were heavy on specs and product advantages rather than on outcomes for me. As I have written about on my own blog, the corporate customer’s concerns are far more about demonstrable improvements in business, budget matters, and cultural / political ramifications. If you can articulate to me my better future with your product or service, I really don’t care very much about your competitors.

That said, it’s a common practice to compare three comparable products when they all appear to do the same thing. Even then, the better move is to define an experience for me that transcends the grouping rather than being fairly interchangeable. When you’re reasonably interchangeable, low price wins.

Excellent post. In working with start-us for a long time, I have seen this as the major flaw in strategic planning. That eventually led me to seeking a “better way”, which I found in the early value innovation work on the late 1990’s by Chan Kim. In 2005, they brought it to the mass market as “Blue Ocean Strategy”. This is now the strategy formation process I use with clients (the “tool box”). The beauty for a start up is that it forces them to focus on the “as is” and then clearly articulate the “to be”. As a start up, they have no customers, so they must create the offering in a new way based upon solid in-market research of what these non-customers value…or not value. It’s always surprising and revealing insight. If a start up cannot do it, my experience has been that they don’t really have a break through and won’t ultimately be successful in fund raising. Entrepreneurship by accident isn’t likely to succeed.

Boy, that table scared me. Yes, you should look at everything imaginable that compares you to the customers but… where is the analysis that tells me what matters? What matters to the customer? What matters to the competitors? (And if we can find places where the customer cares a lot more than the competition… heh, heh)

Talking to customers- rather, talking to the *right* customers (& knowing who they are) is indeed essential. Too often that matrix is filled with aging secondary data and/or what seems ‘logical.’

p.s. not to go ‘chasm’, but even if you do this well & you’ve only looked at early adopters, you may get a very different (and fatally flawed) picture.

I am glad you did´t see one of my tables… I have a thing for them. 😉 Why write it, when you can put into a table?

In your comment you made a point I can relate to very well. When looking at our feature set, it is really two distinct products combined. The first product is for the early adopters to get some traction. But for the real target mark we need to change our feature set even drop some features which are simply not fitted for a broader audience.

Investors should probably ask: “what has happened to others who entered this market? Did they fail or pivot?”

I just revised a competitive analysis for a potential investor. Nothing fancy: just a list of potential competitors, when they were started, how much money they raised if applicable and a little text about them.

Many of those that were competitors last year have now done a pivot, using the same core technology in the advertising market. I assume that this is more profitable for them, or they were unable to get traction in our chosen area.

Done to get some background knowledge, my competitive analysis lead to better questions and new strategy ideas. I’m happy with the results.

It seems to me that the most successful startups this decade have focused a lot less on their competition and a lot more on the customer.

Even in the book Blue Ocean Strategy, the competitive analysis graphs were made only after the company had a firm grasp on what mattered to their customer. For instance, Southwest wanted to appeal to the low cost traveler and realized that this person doesn’t care about assigned seats or good meals. They just want cheap plane tickets.

I too have built several analysis tools and they always seemed to be an exercise in vanity.

Southwest is a good example of a how a company is able to achieve competitive advantage. I also consider Southwest though, to tailor all of its activities to achieve sustainability and operational effectiveness by making strategic trade offs. In order to provide low fares and frequent departures, Southwest didnt solicit customer feedback, they made trade-offs- they chose to stop offering meals, assigned seating, etc in order to offset costs.

In my experience doing user research (ie. actually getting out of the building and talking to people), I’ve found that one of the best ways to figure out how to differentiate from competitors is to watch people using your competitors’ products.

In general, it turns out that users are only using a fraction of the features being offered by competitors, and some of those features probably don’t work the way they want. Identifying and focusing on the few things that users actually need means releasing a much simpler and more intuitive product that only does what your customers want.

Excellent post. The science of business is too often put on a bumper sticker. Create a Business Plan. Put together a competitive matrix. Etc.

But on the other hand how else can you begin to understand the market? Though this is just one dimension, you need to start some place, the market is rife with uncertainty, what works for company A will not work for company B, it’s also hard to quantify fickle, which is what most customers really are.

Enjoyed the post and the comments. A great reminder of a basic principle. I have always found it surprising how often the competitive analysis slide seems to reinforce the credibility of a strategy that is patently not working. If you are not sellling, then something is wrong and, as you put it, the answer is probalby not in the buiding.

[…] analysis,” which attempts to identify potential competitors and their products. But beware, writes serial entrepreneur Steve Blank – if done wrong, a this analysis can set companies “back months and possibly even kill […]

Back in the early 80’s when Mentor Graphics was formed, rumor has it that Bruggere, Langler and Moffenbeier went around the country with a set of overhead projector slides (foils) traveling from customer to customer. This was before a single line of code had been written for any of the Mentor tools. They were asking customers what they wanted in EDA tools and crafting his presentation as he went. (No powerpoint back then!) When his slides stopped changing he hired engineers and started making tools. I would say he was wildly successful with this approach. It seems he was able to know the customer’s problems better then they knew them themselves. For a while Mentor sales people could *tell* the customer what they wanted!

Back in the early 80’s when Mentor Graphics was formed, rumor has it that Tom Bruggere (with Langler and Moffenbeier) went around the country with a set of overhead projector slides (foils) traveling from customer to customer. This was before a single line of code had been written for any of the Mentor tools. He was asking customers what they wanted in EDA tools and crafting his presentation as he went. (No powerpoint back then!) When his slides stopped changing he hired engineers and started making tools. I would say he was wildly successful with this approach. It seems he was able to know the customer’s problems better then they knew them themselves. For a while Mentor sales people could *tell* the customer what they wanted!

But to yours & Dave’s (& Scott’s) points – my grad school mentor liked to lay out what futurists call “cross-impact matrices” where you map product benefits against external environments… when it comes to the competitive landscape, you can see existing conditions… but it also lets you ask “OK, I can beat the competitors on *this* benefit but what if the world changes? Like if the competitors copy my move?”

[…] to any software. How useful are 'checkins' to more serious software? It remains to be seen. Steve Blank's latest post on this sort of competitive analysis driving feature sprawl has an interesting summary of why this may not be such a great […]

The competitive analysis was hilarious ! Liked the Advanced Hiding features best.

I don’t think competitive analyses mean much but unfortunately a lot of people ask for them, right from potential investors to potential partners to potential employees. Generally it means that they have to justify their decision to a higher-up or get buy-in. It’s like that revenue plan. Most people should know they are subject to high rates of error, but ask for them anyway.

Steve – this post and so many of your others are really fantastic. I’ve been an entrepreneur for a long time and you articulate beautifully things that I either already believe or things that I should believe.

Great post, as always. In my opinion, competitive analysis has its place, even in new markets. But in those situations, it should be more of a defensive tool, helping you understand what the risks of potential substitutes are, rather than driving product development. A quick look into the rear view mirror now and then combined with some contingency planning is important if you end up being in a space where a big competitor suddenly steps in.

[…] also tend to use competitive analysis to shape their marketing requirements. Steve Blank made some excellent insights into why this leads to feature bloat. The poor reviews of the HTC EVO are proof that—though […]

[…] also tend to use competitive analysis to shape their marketing requirements. Steve Blank made some excellent insights into why this leads to feature bloat. The poor reviews of the HTC EVO are proof that—though […]